The intensifying fragmentation of the British supermarket sector has prompted me to take a cautious stance on Tesco (LSE: TSCO) and the so-called Big Four operators for a long time now.
Aldi and Lidl have famously changed the game, their emergence into the mainstream more than a decade ago showing shoppers strained by the 2008/09 financial crisis that they could load up their baskets for less without necessarily having to compromise on quality.
These chains remain dedicated to expanding at a breakneck pace to keep customers flocking from Tesco, which once claimed £1 out of every £7 spent in the UK back in its heyday.
Just this month Lidl announced that it was creating 700 new jobs, as well as plans to open 50 new stores and refurbish 30 existing outlets, by the close of the year. This followed news at the turn of the year that the German disruptor was planning to build new warehousing facilities outside Luton, Bedfordshire to service its stores around London.
But the competition isn’t only intensifying for Tesco’s bricks-and-mortar operations, of course. Amazon, for example, has big ambitions to build its position in the online grocery market, as illustrated by its $1bn takeover of video doorbell and camera manufacturer Ring this week. The move is seen as an attempt by the US giant to boost its delivery capabilities by dropping off goods, like perishable items such as fruits and vegetables, directly inside customers’ homes.
Clearly Tesco has a lot of work in front of it to keep its recent sales uptick moving along, even if City analysts are confident it can battle through these choppy waters to follow earnings growth of 56% in the year to February 2018 with rises of 26% and 23% in fiscal 2019 and 2020 respectively.
I am not convinced however, and believe the tough trading backdrop caused by falling consumer spending power and the aforementioned competitive pressures leaves these projections looking a tad giddy.
In fact, a forward P/E ratio of 16 times looks a bit too toppy in my opinion in light of these factors. I reckon there are many superior FTSE 100 growth stocks to buy today.
Travis Perkins (LSE: TPK) is another London-quoted retailer in trouble today.
Indeed, the builders’ merchant found its share price diving 9% in Wednesday business on the back of fresh, frightful financial news, meaning the share is now dealing at five-year lows around £13.
The FTSE 250 business announced that, although revenues rose 3.5% in 2017 to £6.4bn (or up 3.3% on a like-for-like basis), adjusted pre-tax profits slumped 10% last year to £343m.
Chief executive John Carter made a rather sobre assessment of the Travis Perkins performance, commenting: “2017 was a challenging year for the group, with continuing uncertainty in our end-markets, and declining consumer confidence throughout the year.” And the company now expects to make no profits improvement at all in 2018, it said, which comes as no surprise given the ongoing problems at its Plumbing & Heating division.
On the back of this guidance, broker expectations of a 5% earnings rebound this year, and a 7% advance in 2019, are looking a little flimsy right now. Despite its low forward P/E ratio of 11.3 times, I for one am not tempted to invest today.
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Royston Wild has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.